To track the intended -- and more importantly, unintended -- consequences of policies,market movements,buyout deals and regulatory censure. This forum will map the multiplier effect of what may seem minor events initially but spread out far and wide.

November 2010

11/28/2010

Hmmm….this could well be the worse diplomatic blow out that US government has ever been pitted against. The New York Times and Wikileaks’ uncloaking of the US diplomacy, its manner of negotiating for favors and brutal views on world leaders, is going to haunt the White House longer than they may be willing to admit right now.

First a quick snap shot of what’s in the 3 million leaked state cables that will rock boats in the world community:

“Gaming out an eventual collapse of North Korea: American and South Korean officials have discussed the prospects for a unified Korea, should the North’s economic troubles and political transition lead the state to implode. The South Koreans even considered commercial inducements to China….. the American ambassador to Seoul…told Washington in February that South Korean officials believe that the right business deals would “help salve” China’s “concerns about living with a reunified Korea”.”

“Bargaining to empty the Guantánamo Bay prison: ….American diplomats pressed other countries to resettle detainees…Slovenia was told to take a prisoner if it wanted to meet with President Obama, while the island nation of Kiribati was offered incentives worth millions of dollars to take in Chinese Muslim detainees…. The Americans (also) suggested that accepting more prisoners would be “a low-cost way for Belgium to attain prominence in Europe.”

“An intriguing alliance: American diplomats in Rome reported in 2009 on ….an extraordinarily close relationship between Vladimir V. Putin, the Russian prime minister, and Silvio Berlusconi, the Italian prime minister and business magnate, including “lavish gifts,” lucrative energy contracts and a “shadowy” Russian-speaking Italian go-between. They wrote that Mr. Berlusconi “appears increasingly to be the mouthpiece of Putin” in Europe.”

A “cable’s fly-on-the-wall account of a January meeting between the Yemeni president, Ali Abdullah Saleh, and Gen. David H. Petraeus, then the American commander in the Middle East, (on Yemen covering up for American missile strikes on a local Al Qaeda branch)….. is nonetheless breathtaking. “We’ll continue saying the bombs are ours, not yours,” Mr. Saleh said, according to the cable sent by the American ambassador, prompting Yemen’s deputy prime minister to “joke that he had just ‘lied’ by telling Parliament” that Yemeni forces had carried out the strikes.

Phewww…if there is one job I wouldn’t envy right now, it is US Secretary of State Hilliary R Clinton’s. This is the classic case, as I see it, of a butterfly flapping its wings --- a small-time disgruntled US intelligence officer here who took advantage of a security breach – and causing diplomatic tsunamis across the world. Why do I say so?

¯ US will find it increasingly harder, if it wasn’t hard enough already, to clinch global agreements on policy and military issues with other nations across a bargaining table. With so much dirty laundry out there, it may not find many vociferous allies.

And I don’t even want to imagine how unbending China, with its increasing assertiveness in the world order, is going to get hereafter. The country clamped down on Google and Facebook, paranoiad as they are on security breaches and information crossing borders. This is a whole different level even for them to react to!!

¯ US’ diplomatic and state officials are bound to be under greater suspicion, hence scrutiny, may risk expulsion and will certainly be blocked from carrying out their duties smoothly. I wonder why these officials were looped in when they have had no training or expertise in clandestine methods of “Humint”, a spy-world jargon for human intelligence collection, NYT explains.

¯ There will be a rise in counter-intelligence on US, its agencies and its officials by other nations. Intrusion and heavy handedness by one country is invariably a slippery downward spiral; if one goes down, many others will likely follow it.

On the extreme: this is the kind of stuff that can pull down governments – in some instances, it should -- or stoke violent backlash from a surging ‘anti-American’ sentiment globally.

The US government machinery is in full fire-fighting mode with Clinton reportedly on stand by for any damage control. She had spoken to leaders in China, Germany, Saudi Arabia, the United Arab Emirates, Britain, France and Afghanistan on Friday pre-empting the Sunday release of documents. India, Canada, Denmark, Norway and Poland too had been warned.

But forewarning may not blunt the edge of the actual content. Especially such scathing, personal content…and compromising ways of governance globally.

Philip J Crowley, assistant secretary to the US Department of State in a November 24 briefing had told reporters that this was “harmful to our national security”, it put countless “lives at risk” and was “going to create tension in our relationships between our diplomats and our friends around the world.”

“We wish that this would not happen,” said Crowley.

I wonder if ‘wishing’ was for the leaks to not happen or for the US government to have been more discreet, less intrusive and hence less vulnerable to Wikileaks.

NYT’s Note to readers : why they published what they did and how they balanced the conflicting interests of informing the readers but not over-educating the terrorist outfits to the point of disserving the country.

11/19/2010

The US Federal Reserve will sooner than later be in need for a crisis communication team. No matter what they do or don’t do, there is someone out there to ready to bite them for having done too much or too little.

Their latest round of buying bonds and pushing money in people’s hands called ‘quantitative easing’ and nicknamed QE-2, lays out this premise perfectly. Let’s take a quick look at all the unintended outcomes that the Fed did not sign up for:

1. Protectionist sentiments globally are leading to non-tariff walls. The backlash from international community has been storied to death by now but that is not the end of it. Once these countries are done ranting, they are going to begin acting, take compensatory measures and that’s when the protectionist tone of this backlash will begin to bite. Brazil, which saw a massive appreciation in its real in 2009, has already a transactions tax on capital inflows in place. It raised this tax recently. Thailand has also imposed a tax on foreign holders of domestic securities while Philippines and Indonesia are believed to be considering imposition of capital inflow controls. Such walls will block off some of the hot money that is washing up their shores but create barriers.

2. Fresh from their victory paint in the November mid-term elections, the Republican’s whipping of the monetary policy, to the extent of clipping the central bank’s three-decade old dual mandate (http://www.washingtonpost.com/wp-dyn/content/article/2010/11/16/AR2010111606151.html ) to merely inflation management and staying off efforts at employment generation, is stinging and unprecedented. Hard to believe either Fed chairman Ben Bernanke nor his officials would have pencilled that in as a consequence while chalking out QE-2.

3. There are possible winners too but they are as unintended recipients as they could be. While the governments and their central banks are crying hoarse about possible asset bubbles – dollar pumping by the Fed is increasing capital inflows to the high yield developing countries and stoking asset prices – it is giving companies in these countries to lock in huge capital at good rates.

A string of mega-IPOs – Petronas Chemicals’ $4 billion, Malaysia’s largest; Coal India’s $3.5 billion offering which would be India’s largest; Global Logistic Properties’ $3 billion in Singapore and AIA’s planned IPO of $21 billion in Hong Kong – that have just hit the market or are in the fray stand to benefit hugely from Fed’s gravy train especially if it ends up spilling the dollar curry outside US. And that seems like a very real possibility.

And the worse part: Fed’s own officials admit that the impact of QE-2 on what it’s actually aimed at – the only intended consequence of spurring growth in the economy – may not fly too far. New York Fed President William Dudley in a recent interview to CNBC said the critics were “off-base” but agreed that that the asset purchases would not have "a huge powerful effect on the U.S. economy."

Hmm…okay, so how come QE2 is doing everything else except what it is supposed to do!??

11/17/2010

A slew of anti-trust lawsuits against JPMorgan Chase & Co and HSBC Holdings Plc questioning their role in manipulating the futures market for silver, is stoking debate -- and investigation -- on the extent of influence these big global banks exert in commodity markets and if that constitutes unfair advantage.

The outcome of these lawsuits and a probe by the US’ Commodity Futures Trading Commission (CFTC) is expected to nail reasons behind huge volatility in the futures and options market for silver as well as shape regulatory oversight in the trading of commodities.

Although “naked short selling” has been a serious issue for long on the Wall street, Steve Berman, managing partner at Hagens Berman Sobol Shapiro LLP, one of the firms that has filed a lawsuit, said it was the “the scope and intent of JP Morgan and HSBC's actions in this short-selling scheme (that) dwarfs any other similar attempt to manipulate a commodities market."

New York-based JPMorgan and London-based HSBC have not commented on this issue so far. The Seattle-based class action litigation firm has filed the case on behalf of an individual investor Carl Loeb.

‘Naked short selling’ refers to the practice of selling a financial instrument without owning it and without making arrangements to borrow it later to settle the transaction. Traders in such scenarios bet that they will buy the instrument later when the price crashes and pocket the profits.

“The extent of damage depends on how wide you cast your net since there are concentric circles of liability. One estimate pegs it at $100 million,” said Sean Matt, a partner at Hagens Berman over a call.

The two banks, in this case, are under fire for having amassed huge short positions with an intent to allegedly depress its prices and book profits as they controlled more than 85 percent of the commercial net short position in silver futures contracts. JP Morgan built on its silver short positions even more after its March 2008 acquisition of investment bank Bear Stearns. Another lawsuit by Kaplan Fox & Kilsheimer LLP on behalf of an unnamed individual investor claimed that the manipulation was on as recently as March 2010 when a whistleblower, a metals trader based in London, reported the scheme to the CFTC.

Matt said that as many as 20 class action complaints had been filed against the two banks but explained that most of them were anti-trust claims while his firm was charging them with “violation of the Commodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act.” “We have no direct legal precedent per se for so many shorts in one market,” he added.

Bill O'Neill, managing partner at New Jersey investment firm Logic Advisors, said that silver market has a history of very high volatility – in 1980s when the Hunt Brothers’ case was probed -- and rallies along with gold since the same fundamentals apply to both the metals.

Silver, however, “doesn’t have a huge and global cash market unlike gold,” making it a “speculative playground” suitable only for the big boys, he explains.

CFTC has already proposed regulations for greater power to thwart price manipulators in October-end. When asked about its probe on silver futures, its spokesperson Scott Schneider declined to comment on any impending investigation.

One of the CFTC commissioners Bart Chilton, however, had spoken publicly in October on how “the public deserves some answers to their concerns that silver markets are being, and have been, manipulated.” If the government oversight body has to nail these banks, it will have to prove their ability to influence prices, specific intent to do so and that artificial prices existed.

Not everyone is buying the conspiracy theory though. “Silver is volatile and that leads people to believe it must be rigged. Lawsuits by these individuals against two big corporations is really jumping the gun,” said O’Neill.

An analyst tracking JPMorgan with a New York-based brokerage, who did not wish to be named, said he hadn’t been following the lawsuits much. This hardly seems an outlier amongst the analyst community since most of them seem to be overlooking this for now. No report on either JPMorgan or HSBC has been published by brokerages since the outbreak of these class action lawsuits nearly three weeks back, according to New York University library databases.

"Silver lawsuits will have no impact in short-term, if ever. Most likely they will be thrown out,” said Ned Schmidt in his Value View Gold Report explaining that “the CFTC tests for manipulation are well established, and extremely hard to prove."

He may have a point. Only once in its entire 36-year history has the regulator successfully concluded a manipulation prosecution, in a 1998 probe on prices for electricity futures.

‘Canine detectives’ are increasingly being called in to bust bed bugs in New York City hotels, theatres and even upmarket residential buildings, as the infestation becomes a pandemic and threatens home owners with depreciating real estate values and stigma.

These trained dogs can swiftly go under covers, around the tiniest of corners and search houses in a fraction of the time taken by human inspectors – making them the most effective search parties, said experts in an early morning conference on Thursday to discuss way to contain and guard against this spreading menace in the city.

“A dog basically does an MRI of your house with a nose. While human inspectors often take days to look through a house and can still miss some bugs, dogs can sniff a house inside out in seven seconds and with give no false alerts,” said Pepe Peruyero, founder of Bed Bug Super Dogs, as he spoke to a packed hall of journalists, house owners, tenants and retail managers.

source: Care Pest & Wildlife Control

Peruyero has spent three years devising a proprietory method for training dogs to detect live bugs and viable eggs and finds it curious when people quiz him about dogs’ abilities to sniff out these bugs. “Well, we knew they can detect narcotics and explosives all along, right? Bed bugs are no different. A dog just needs to be imprinted with the principal smell,” he explained. His firm has already conducted 100,000 inspections this year.

“I had not heard of bed bugs even once in my office in the first 25 years of practicing my profession. In the last 2 years, I have heard it at least a few hundred times,” said Jeffery Turkel, partner in real estate law firm Rosenberg & Estis P.C who specializes in landlord tenant litigation which he says are increasingly being triggered by these bugs.

Bedbugs, that were once nearly eradicated, have now spread across the city in part because of the decline in the use of DDT and increased movement of humans and goods.

These pesky critters can jump onto your shoes, clothes, books, office drawers, old mattresses and as Peruyero recalls, “were even been found in an X-box once.” They travel long distances – sometimes dubbed the best hitchhikers – surviving up to a year without food and can live in colder climates as well, explained entomologist Louis Sorkin.

Found in the best of homes and most public of places -- from creeping in the basement of the Empire Estate building to AMC’s movie theater in Times Square, around a Victoria’s Secret store in mid-Manhattan and even into the Brooklyn district attorney’s office -- these blood suckers even in one remote apartment can drive down rentals in entire buildings and are causing unusual landlord-tenant lawsuits.

In these litigations, both parties are fighting over who got these insects in the house and by implication, should pay for the clean-up. A New York State law now requires home owners to disclose to prospective tenants any infestation incident in the lat 12 months.

According to the city’s Department of Housing and Preservation cited by a New York Times story, bedbug violations have risen 67 % in the last two years. For the year ended June 30, the city’s 311 help line recorded 12,768 bedbug complaints, 16 % more than the previous year and 39 % more the year before. A New York City community health survey showed that in 2009, 1 in 15 New Yorkers had bedbugs in their home.

The silver lining: the bugs do not spread diseases or impose a health risk.

But they cause something worse – massive stigma and ostracization in communities and among friends. “I was going through the cases in this area and was surprised to find the names of landlords and tenants blacked out. I had only see that happen in family law, assault, abuse and divorce cases,” said Turkel who said he suggested his clients get the clean-up done “at nights and as quietly as possible.”

The sniffer dogs in most cases who map these infestations have been seen to achieve as high as 97% accuracy rate compared to a 30% visual, human detection rate.

But the dogs can only spot the bugs, they can’t contain the menace. “For a city that spends and trades in billions of dollars and has hundred of architects, interior designers and health workers, we have dogs as our first line of defense? That surely can’t be good news,” said Turkel.

11/06/2010

US’ monetary policy is making life very hard for US’ foreign policy. This is straight out of the classic adage that you can’t make everyone happy all the time. But then it is always prudent to watch out for exactly who you are making unhappy and what handles they could have over you.

The Federal Reserve on November 3 announced that it was going to buy an additional $600 billion worth of treasury bills over the next eight months to spur employment and kickstart the sagging US economy. While that may or may not revitalize the economy, it has achieved another unintended outcome for sure.

Fed’s policy action has managed to irk developing nations who foresee this dollar deluge sweeping up on their shores and creating, as they fear, asset bubbles. And that can make President Obama’s current visit to Asian countries before he meets heads of G-20 nations, very tricky.

The Fed’s action will effectively increase dollar supply and, it hopes, raise consumer spending. What will also happen alongside is devaluation of the dollar against other currencies, thereby eroding the export competitiveness of nations whose monies appreciate.

This would have been okay in other times. But when this happens two weeks after the finance ministers of G-20 have hammered out a difficult deal to contain an escalating currency war and just a week before President Obama meets his G-20 counterparts to seal the currency management agreement, it is exceptionally slippery. Whatever little was achieved in October 23’s G-20 communique now threatens to come undone.

How will US persuade other nations to allow appreciation of its currency when it is devaluing its own?

Agreed, Fed is the Central Bank of USA and will put domestic policy above all else. But by the same token, so does every central bank for its own country. Then how does one angle in international cooperation when the domestic policy is pulling it in another direction? I’m just glad I don’t have to answer that one… :)

Meanwhile, global community has been mincing no words and will likely grill US in the G-20 summit. German Finance Minister Wolfgang Schaeuble said the US is undermining efforts to create a level playing field in the currency market. "What the U.S. accuses China of doing, the U.S.A. is doing by different means," he said. China has also asked that “someone to step forward and give us an explanation”. The overseas edition of the People’s Daily in mid-October had carried a commentary from Li Xiangyang, an economist at the Chinese Academy of Social Sciences saying: “It is the dollar that triggered the currency war” and “driving the value of the dollar down is in line with America’s interests” – something “the international community ought to stay vigilant” about.

But then the US government has figured out it would rather please its domestic constituency first. Angering the world community is an externality that can be managed over time!

11/04/2010

We heard an interesting story about ‘money’ in our Global Economy class – about commodity money to be specific -- a few days back. It made me smile as I realized how the more things change supposedly, the more they remain the same J

Here goes the story:

About 500-600 years, the inhabitants of a tiny island called Yap, amidst the scattered specks of sovereign island nation Micronesia found its money in large, circular stone disks carved out of limestone. Called ‘Rai stones’, these coins were sometimes up to 10 feet in diameter and could weigh 4 metric tons. This wasn’t exactly our common jingling-loose-change-in-the-front-pocket that we reduce coins to!

A Rai Stone specimen

Source: Friar Forex website

Quarried from the island of Palau, these stone-coins were punctured with a hole in between so that men -- as many as hundreds sometimes – could put a bamboo through it and lug it on canoes and rafts to Yap, where they were used in transactions.

It’s value depended not just on how huge and exquisite it was but on whether the stone has a story. If many people – or none at all -- died in its transportation, it became far more precious. Rai stones till date are transacted upon in Yap on traditional ceremonies such as marriages, inheritance or to bury a family dispute!

In one instance -- and that’s where I got hooked -- a Rai being transported by canoe was accidentally dropped and it sunk to the sea floor. Although it was never again seen not could it be retrieved, still everyone continued transacting on it as if it were genuine currency for years thereafter.

As everyone agreed, Rai must still be there!!

Why does it remind me so much of the mortagaged-backed securities (MBS) and the umpteen times it was wrapped in yet another layer of securitization, until the structure became so complicated that nobody knew how to price it anymore? Or what was the piece of paper worth that they were holding in their hands?

Just like the Rai stone, these MBS just went on being traded since everyone agreed the houses and their value must be there, somewhere….and just like the rai stone, it had sunk, sitting somewhere deep down in the value spiral…and was as irretrievable as the stone-coin.

The only good reason why the ‘Rai’ bubble never burst was because nobody ever knocked on the doors of the guy from whom he had bought it off saying, “I don’t want this piece of paper anymore. I want the real deal. Go get the stone!” The real deal that just happened to be sitting at the sea-bed.